1. (C) Summary: Iceland's new government coalition of the
Independence Party (IP) and the Social Democratic Alliance (SDA)
announced their ministers and policy statement on May 22-23. Geir
Haarde will stay on as Prime Minister, while SDA leader Ingibjorg
Solrun Gisladottir will become Iceland's second female Foreign
Minister. The center-right IP retains control of the Ministry of
Justice (under current minister Bjorn Bjarnason) and made few changes
to its cabinet lineup. In addition to Foreign Affairs, most of the
key economic and welfare ministries went to the center-left SDA. The
coalition's policy statement focused almost exclusively on domestic
social welfare issues, with a sole paragraph on foreign policy
containing a deliberately ambiguous sentence "lamenting the war in
Iraq." Post believes that on key U.S. policy concerns PM Haarde will
work to keep bilateral relations on a smooth course, while
FM-designate Gisladottir will work to quietly nudge Iceland ever
closer to EU membership. SDA control of the economic ministries may
have implications for continued investment in power-intensive
industries. Down the line, Gisladottir's clear ambitions for the PM
slot may trigger a coalition implosion partway through its 4-year
term, with Gisladottir hoping that her party comes out of the rubble
to lead a new center-left government. End comment.

After 12 years, a new coalition
-------------------------------
2. (U) After five days of formal negotiations, Independence Party
(IP) Chairman Geir Haarde and Social Democratic Alliance (SDA) Chair
Ingibjorg Solrun Gisladottir each received approval from their party
governing boards for a new coalition agreement. They presented their
ministerial lineups on the evening of May 22. Each party received
six ministerships, with the IP retaining Haarde as Prime Minister.
There was little change to the IP slate of ministers apart from the
consolidation of the Ministries of Fisheries and Agriculture, and the
addition of the Ministry of Health (which the Progressive Party ran
under the previous coalition). For the SDA, Gisladottir took the FM
slot after some speculation that she would opt instead for a greater
role in domestic policy, perhaps through the melding of one or more
current ministries. The resulting cabinet is as follows:

3. (SBU) The IP-SDA talks began on May 17 after the announcement
that coalition talks between the IP and the Progressive Party (PP),
partners of 12 years, had collapsed. The fallout for the
Progressives has been considerable, as PP Chair Sigurdsson has since
maintained that he was led to believe that Haarde was sincerely
interested in continuing the coalition despite the shrinking of the
IP-PP majority to a single seat(reftel). Sigurdsson voiced his
disappointment and sense of betrayal when IP-SDA talks began within
hours of the IP-PP announcement on the 17th, and his dismay only grew
with reports that Haarde and Gisladottir had been in informal contact
as early as May 16. Haarde's response has been to note that
"everyone knows how the process works" after elections in a
parliamentary system. Sigurdsson, who failed to be elected to
parliament on May 12, announced his resignation as Progressive Party
Chair immediately after the coalition agreement was presented to the
public on May 23.

4. (U) Procedurally, the new government formally takes office on May
24 at a meeting of the State Council (composed of the President,
Prime Minister, and Cabinet). The old State Council will convene,
officially retire, and the new Council will then convene.
Afterwards, there will be a series of official ceremonies at the
ministry buildings in Reykjavik as outgoing ministers present the
symbolic keys to their offices to their successors. Meanwhile, the
Althingi will convene during the week of May 28 to formally elect the
Speaker of the Althingi (outgoing Minister of Transport Sturla
Bodvarsson -- IP) and designate committee chairs and members.

5. (U) The coalition agreement's statement of policy devotes
extensive attention to social welfare and economic matters, with an
obvious effort made to split the difference between each party's
campaign promises. The IP managed to preserve the current emphasis
on a business- and investment-friendly regulatory environment,
maintaining and even reducing Iceland's current low corporate taxes
and including guarantees that the private sector will continue to
take the lead in Iceland's economy. (Comment: A move apparently
intended to quash fears of a return to Iceland's heavily socialist
economy of the 1970s and -80s. End comment.) At the same time, the
SDA pushed through its objectives of increased pension and state
insurance expenditures for the elderly and disabled, as well as
pledges of improved health care and services for children. SDA Chair
Gisladottir has also highlighted the agreement's pledge to reduce or
eliminate gender-based wage disparities (a fitting effort for one of
the founders of Iceland's "Women's List" political party in the
1980s). The statement does not, however, clarify what moves will
result from the SDA's control of the Ministries of Industry,
Commerce, and Environment, which could have major implications for
continued investment in the aluminum sector and other
energy-intensive industries. Rather, the agreement's language
focuses on "finding a balance" between economic development and the
use and protection of natural resources, without laying out concrete
actions.

...but placates both parties on Iraq
------------------------------------
6. (SBU) On foreign policy, the agreement reflects an obvious
attempt to give the SDA some cover regarding its election promise to
remove Iceland from the list of the Iraq "Coalition of the Willing",
while avoiding alienating the IP (and particularly those close to
David Oddsson, who was PM at the time of the invasion). The
Icelandic wording chosen can be translated as the GOI "lamenting"
either "the war in Iraq" or "the conduct of the war in Iraq," leaving
ambiguous as to whether the statement refers to the current situation
or the means by which the current situation came about. In comments
to the press, the PM and FM have each presented their own view on
what the statement means. For his part, PM Haarde said, "we know the
history and the position of the parties [in 2003] but of course we
lament the situation there now," adding that the GOI will not let the
events of four years ago affect its continued cooperation and efforts
in Iraq. (Note: Iceland deploys a Public Information Officer to NATO
Training Mission-Iraq. End Note.) On the other hand, FM-designate
Gisladottir claims that it "is clear that the government laments the
war and its conduct" and that subsequent GOI translations of the
statement will make the intent of the government clear. More
constructively, the document does indicate that Iceland intends to
continue or strengthen its humanitarian and reconstruction activities
in Iraq and the Middle East.

7. (SBU) On other foreign policy issues, the new government pledges
to take the lead on international environmental issues (particularly
ocean pollution and climate change) and follow a "decisive security
and defense policy." A separate section on European Affairs notes
that the GOI will establish a cross-party working group in the
Althingi to study issues related to Iceland's membership in the
European Economic Area and the "development of issues in Europe"
(read: the strengthening of EU institutions) and make recommendations
accordingly. (Comment: The SDA is the only Icelandic party to be
openly pro-EU membership; this appears to be a compromise to allow
the IP to kick this particular can further down the road while
letting the SDA claim they are making progress on the issue.)

Comment
-------

8. (C) Post concurs with FM-designate Gisladottir's assessment to
the press that the new coalition represents a significant
reconciliation of different viewpoints and political philosophies on
the right and left. We add the caveat, however, that this will only
be true if the whole grand enterprise stays intact for a full
four-year term. PM Haarde continues to enjoy phenomenal popularity
ratings hovering around 60 percent in most polls, while Gisladottir
has consistently ranked as the "least trusted" Icelandic politician
over the last year. Gisladottir's ambitions to be Iceland's first
female prime minister are clear, and press and political observers
are already speculating that she will attempt to force a
confrontation with the IP in a few years. In such a scenario,
Gisladottir would hope to recruit the Progressives and the Left-Green
Movement into a center-left coalition in which she would be prime
minister.

9. (C) In the short term, we expect that Gisladottir will attempt to
use the FM post to shore up her credibility and public standing,
earning voters' trust that she can be relied upon as the nation's

REYKJAVIK 00000158 003 OF 003

leader. She will work to nudge Iceland closer to European
institutions-always an objective--but for the time being we do not
expect her to provoke the IP on this issue. Although she will
probably follow the Icelandic pattern by making her first foreign
trip to the Nordics, Gisladottir will likely want a Washington trip
sooner rather than later in order to begin burnishing her credentials
in the International arena.

10. (C) As he has during his first year as PM, Haarde will keep
Icelandic-U.S. relations on the front burner, particularly in defense
and security affairs. His clear preference is for Iceland to work
through NATO for its security, and the retention of Minister of
Justice Bjarnason is an important signal that the PM intends to
continue recent efforts to strengthen Iceland's domestic security
institutions and its Coast Guard.

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